A rocky fall? Perhaps.

Stocks are about to plunge, Wells Fargo warns

The Wells Fargo strategist has been bearish on stocks all year, even as she watched the S&P 500 (^GSPC) add 21 percent.

And so long as she doesn't change her mind, eventually she'll be right.  It's an old story, I know.  But wait.  It gets better.

First of all, Adams is highly skeptical about the rally that the market has enjoyed thus far. 

I've always wondered about people who are skeptical about something that is actually happening, or has actually happened.  What does that mean, exactly?  I can see being skeptical about the reasoning behind the rally, but to actually be skeptical of the rally that has already happened doesn't make much sense.  Of course, it could be that we are all experiencing some kind of collective hallucination, in which case, we would be right to be skeptical of what we see.  But then again, if that were the case, we would probably be better off accepting what we perceive to be truth as truth and act accordingly.  Kind of like if you're crossing a street and hallucinate a car about to run you over, you're probably better off trying to get out of the way of that car, even if it isn't there.  Unless, of course, in doing so you run right in front of the freight train you didn't see.

"It's all about emotion at this point. The entirety of the S&P 500's increase this year has come via the multiple," Adams said. "It's been simply through the amount that investors are willing to bid up the value of the future earnings stream."

Yeah, I don't think it's much about emotion, unless that emotion is that you'd rather make a higher return than the negative real returns otherwise available.  Still, as I've said a few times this year, or at least I think I did, stocks appear to be a bit overvalued, and after this rally, are even more so.  And, as interest rates rise, it's almost a sure thing that stocks will fall.  Of course, it could be that the market will fall before interest rates rise because of anticipation of the rise, but that doesn't appear to have happened given the current S&P 500 PE of nearly 20.

As it happens, I think the call the the S&P will revert back to about the same level as it was at the beginning of the year might be a bit conservative.  Much of what I've seen implies that stock investors are relatively highly leveraged, which will likely contribute to a much larger decline in stocks.  The good news is, from what I've seen, is that there is also a lot of cash on the sidelines which may somewhat limit the downside.  But, I think that the S&P 500 with a PE of 17 won't be enough to draw this cash in, and expect that when the "crash" does happen, it will be further than 1,440.  After all, that 17 PE wasn't enough to draw in the cash at the beginning of the year, and 17 is still relatively high, especially given the global risks we're seeing these days.

Couple the rise in rates with slow earnings growth, and Adams believes the market is in for a very tricky fall.

I agree, but I think this is an oversimplification.  Investors already expect higher interest rates, so I don't think the Fed tapering will have a significant impact in the short-run, other than, of course, the relief rally that happened immediately after the Fed announcement.  Slow earnings growth is, I think, expected despite the high PE multiple for stocks.  The high PE is the result of low returns available elsewhere.

Well, whatever happens with the Fed and earnings, I expect this autumn to be volatile at the least.  Will the S&P hit 1,440 by year end?  It's a possibility, but it does depend on interest rates rising higher than they are currently, and I'm not convinced that will happen right away even if the Fed does begin to taper its purchases.  I think interest rates already reflect the expectation of tapering, and actual tapering shouldn't lead to much change.